Jimmy Chen, MBA '09

What is up with the economy???

I am a BULL!!!

I love the Fed's action. In my mind, the Fed has two options. If it doesn't act, it is definitely a statement that economy is fine and that inflation problem is more important. However, if it does act, the fed needs to come out swinging, and thus, a 25 basis point cut makes no sense. Basically, if you are already admitting that a recession is a real possibility, then you should try to hit a homerun to fix the problem instead of a single to allow disaster creeps back in. (Don't worry, if you don't get my logic, it's okay... I get that a lot!!)

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Whether or not you agree with the Fed is irrelevant. Whether you believe this fed rate cut will cure the economy is also irrelevant. In this case, only the number matters. The three times when the Fed has cut rate by 50 basis points over the last decade, the S&P has rallied by an average of 12% (that's including the 50 points rate cut in 2001). Rate cut matters. Rate cut improve psyche even if it doesn't solve the problem. When the psyche is improved, the market will rally.

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Don't fight the fed!

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Like I have said before, I think the economy is still strong and I believe the central bank and the white house will do everything to avoid a recession in the election year. I also believe that the US economy will be benefited from the global economic growth. Most importantly, this fed rate cut might just have saved my summer of sitting around without an internship offer!!!

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Join Motely Fool and compete against other stock pickers!!!

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First Major Dilemma

My God!! The semester is flying by fast!!! We have homework before our first class!!! Is that even ethical??? Just a little over a week into the core semester, we have already written 2 memos & 1 case-writeup, read 4 cases, and finished over 7 chapters of textbook readings... for some, we have to finish reading a 600-page book... come to think of it, what am I doing here...writing blog?

As if I am not busy enough, I have applied to work for two start-ups... for free and without credit... i have to keep hammer myself into thinking, "it's the experience that counts!" .... not easy!!

Yesterday was club-fest, and I have signed up for more clubs than anyone I have talked to: 11 clubs plus the prestigious 100K Business Plan Competition. I hope I can survive before the infamous October come knocking!

Now here is the first major dilemma I am facing. Brazil soccer team (Kaka & Ronaldino) is playing at Boston tonight! I have been dying to see this game and bought my tickets months in advance. Yet, the all important orientation for 100K Business Plan competition is tonight, and I just know about it yesterday. It's my future vs. national team commitment (or so I think ^^)!

What would you do?

by the way... below dim sum at China Pearl with Sloanies...

Pacific Penguins

   

Let me tell you... I have an AWESOME core team!!! From the left...

• Talented Hadas -- An Israeli with a Biotech Engineering degree from Ben-Gurion. Last worked at Novetide as a project engineer. She is part of LFM program and is getting dual degrees at MIT. Extremely talented and accomplished at such a young age.
• Energetic Subeom -- The activist of our group. Born in Korea and graduated from Korea University with a Business degree. Sponsored by Boston Consulting Group to spend two years in Cambridge. Promising bachelor...  so ladies, drop me an email and I will get you in touch with him.
• Jonathan the Rock -- The elder of our group... a newly wed. Economist by training. BC Eagles. Last found working as a strategy consultant for Collaborative Consulting group. Extremely patient and mature. Will prove to be the glue that hold this group together when we are all running around like a headless chicken in October.
• Carlos the Strategist -- Born leader and a strategic thinker. Spanish. Received his economic degree from Universidad Pontificia de Salamanca. Last worked at SCPF Advertising Agency as a planner. Fluent in French, Spanish and English.
• Intelligent Heather -- Smart contributor who works well in team. Biomedical Engineer background and worked for Medtronic as a Clinical Engineer. Single, talented, and easy to get along with. Don't bury me with emails about her please...
• Art our adviser -- 2nd year sloanies, who interned for VMWare over the summer.

To sum it up, 33% female, 66% international, 7 languages spoken, 28 years old, 2 biotech engineers, 2 economists, and 2 business generalists, 30+ years of work experiences spanning across banking, advertising, biotech and consulting industry...

yet, with all these talents, we can't seem to figure out on how to make a raft float....

   

Nevertheless... I still love my group... because we are here to learn about methods in solving inventory problem... not on building a raft, right?

Right, that's what I keep telling myself...

Oh boy...

Small World

Shocking!!! Two of my high school friends somehow find their way to MIT Sloan. Is this fate?

Sandy -- Computer Science degree from Berkeley. Former consultant from Accenture.

Steve -- Also computer science degree from Berkeley (though they never met @ Cal). Former manager at Chia Hsin Corporation in Taiwan.

What is up with the economy???

August 16th 2007

Eating my sandwich before heading out to get my MIT student ID, I was shocked to learn that the Dow Composite had dropped another 300 points to 4095. I quite literally had to knock myself unconscious and drag my body out of the door so that I would avoid pressing the Panic Sell button on my 100% equity portfolio. And even though I was later found dancing outside the student center like an idiot with my new ID card, I was worried and confused. "What is going on with the market," I thought to myself, "how can Dow dropped 600 points or 11.1% in just 7 trading sessions? Are we heading towards re... re ... re... recession?" (Oh my... that was difficult to type)

Now... 11 trading sessions later, Dow Jones has bounced back nearly 8% on very low volume. The economy is at a crucial juncture to say the least. September is poised to be a volatile month, as Wall Street participants came back from vacation to analyze Fed's action on Sep 18th and the earning release by Bear Stern and the likes.

Divergence between the Economy and the Credit Market

Here is what I think... The Economy was doing very well for the 1st half of the year. GDP was on pace to a 4% annual growth... Inflation was controlled at 2% a year... Real income was rising and unemployment rate was low. Most important of all, 1st and 2nd quarter earnings for corporate America was growing at 8% and 12% rate, respectively.

Credit market was doing okay as well. Fed has stopped raising Fed Fund Rate for more than a year, reliving price pressure on Bond price. Subprime was not a big problem. Everyone in the market already knew about subprime mortgage mess (or else the yield won't be so high) It's just that most people in June didn't think that this was a real issue because subprime mortgage loans comprised only 2% of the credit market, and the 10% default rate was hardly out of ordinary. So it's not like "subprime woes" was a new news.

Suddenly, fear had started building in July, and Bear Stern hedge fund mess added fuel to this fear. Everyone understandably tried to reduce their exposure to subprime, causing the exit door to be extremely crowded. Investment banks who had quant funds that were heavily leveraged in subprime loans (i.e. Goldman Sachs) were hurt significantly by this market action. With loan's face value in a free fall, suddenly no credit was good credit. Even the prices of the most highly rated bonds were pressured, and as a result, mortgage companies like Countrywide, who would had otherwise been fine financially, were in deep trouble, forcing the Fed to step in and cut discounted rate. Fed's action allowed big player like Bank of America to swoop in and stabilize the mortgage market... for now.

Even though subprime problem hasn't fundamentally worsen to this degree, the fear has caused a real consequence. Usually, the health of credit and stock market are highly correlated with each other, but they are now in divergence. Depends on your personality, you can look at this situation as glass half empty or glass half full. If you are more pessimistic, you would think that the economy would eventually be dragged down by the credit woes because company will have no liquidity to run its operation. But if you are more optimistic, you'll believe that the strength of the economy can ease the problem in the credit market.

My Prediction

Rate cut or not, I think we are fine. I believe that the economy and the stock market will be trending up and we will survive September's volatility. Here are my reasons...

1. Central Bank and Washington DC are well aware of the consequence. They have acted and have promise to do more to avoid a recession, especially during the election year.
2. Corporate America do not need to borrow to run their operation. Cash level at most of the DJ30 companies are at all-time high. Earning growth needs to seriously deteriorate before Corporate America are forced to scale back and borrow.
3. People have jobs and they are becoming richer. Spending is not going away that quickly.
4. Mild hurricane season has kept the commodity price, hence inflation, relatively in check.
5. Global economic growth can save America from recession.
6. I am a MBA student and I am 100% invested in equity. I need the economy to be in a good shape so I can find a great internship and pay off my tuition.

Until next time...